Financial Accounting Exam 2: Chapter 7 Terms
LIFO & FIFO
1. Have opposite effects on the inventory - When prices are falling, the ending inventory on the balance sheet will be higher under LIFO than FIFO 2. Affect income statement in two ways: the amount of cost of goods sold and income/gross profit 3. LIFO has a lower taxable income versus FIFO
Characteristics of inventory
1. Often one of the largest assets → is a significant amount of a business' resources - On the other hand, if inventory is too low it may result in lost sales 2. Used up inventory = cost of goods sold 3. Inventory includes all goods that the company owns, regardless of location.... EXCEPT for consignment goods 4. The cost principle governs the measurement of the ending inventory amount 5. Goods available for sale = beginning inventory and the amount of goods purchased 6. Ending inventory of one period becomes the beginning inventory of the next
Purchases discount
Example: buy in bulk from one company and ask for a discount
Lifo liquidation
It occurs when a company that uses the last-in, first-out (LIFO) inventory costing method liquidates its older LIFO inventory can distort a company's net operating income, which generally leads to higher taxable income
merchandise inventory
The goods a business has on hand for sale to customers
Average cost
average of beginning inventory plus purchases Cost #1 + Cost #2 = X divided by 2 This is a periodic inventory system method
Periodic method, old school
beg inventory + purchases - ending inventory = cost of goods sold Don't need to know the date of each sale Ending inventory is calculated by physical count of remaining goods
Cost of goods sold equation
beginning inventory + net purchases - ending inventory = CGS
Goods available for sale
beginning inventory + purchases... net = cost of goods available
FIFO
first in, first out Cost of goods sold is costed at the oldest unit costs, ending inventory is costed at the newest unit costs Example: products with a shelf life Government prefers this because there are more taxes highest profit, highest taxes, highest inventory, less desired cash flow (more taxes)
Direct labor
included in cost of inventory → who's making it
LCM (lower cost market)
is applied when market is lower than the cost of units on hand The effect of applying LCM is to include the holding loss on the income statement in the period in which the replacement cost drops below cost rather than in the period of actual sale (have to readjust if it drops below market)
LIFO
last in, first out Cost of goods sold is costed at the newest unit costs, the ending inventory is costed at the oldest unit costs Example: material goods, like technology lowest profit, lowest taxes, lowest inventory, most desired cash flow (less taxes)
Finished goods inventory
manufactured goods ready to be sold
Inventory:
materials in store
Raw material inventory
materials of a later created product
Lifo reserve
measures the difference between (FIFO) and (LIFO) cost of inventory for bookkeeping purposes
purchases returns
merchandise a buyer acquires but then returns to the seller
Specific identification
method that requires each item to be marked (often a code) with a cost When it is sold, that unit cost is the cost of goods sold amount "Pick and choose" method When ending inventory is taken, the specific items on hand, valued at the cost indicated on them, is the ending inventory amount
Perpetual method
scanning method
Net realizable value:
selling price - cost of distribution
Factor overhead
the rental of the facility: light, a supervisor salary, etc.